Canada's new climate investment taxonomy framework critical to securing competitiveness, achieving targets, experts say

Today, the Sustainable Finance Action Council (SFAC) released its Taxonomy Roadmap Report featuring a Canadian Green and Transition Financial Taxonomy Framework, backed by Canada’s 25 largest financial institutions.
The Institute for Sustainable Finance and the Canadian Climate Institute contributed to the Report as independent Core Knowledge Partners. SFAC and Knowledge Partner experts are available for comment.

March 3, 2023, TORONTO—Today, the Sustainable Finance Action Council (SFAC) released its Taxonomy Roadmap Report featuring a made-in-Canada framework to establish standardized and science-based definitions of climate-compatible investments.

Backed by the 25 largest financial institutions in the country, which participated in the process as members of the Taxonomy Technical Expert Group (TTEG), the Canadian Green and Transition Financial Taxonomy Framework laid out in the Roadmap Report is key to aligning capital flows with Canada’s climate targets and economic opportunities.

The framework, developed in partnership with the Canadian Climate Institute, serves as a guide for the development of a new climate investment taxonomy (a system for categorizing financial investments or assets) which includes definitions for both “green” and “transition” investments in order to create necessary clarity for capital markets, which are actively seeking sustainable investment opportunities.

Clearly defining those opportunities in Canada is critical to attracting the global capital needed to fund our net zero transition, which is projected to require over $115 billion/year in new investment. That includes significantly reducing emissions from our most energy-intensive industries, which will increase their global competitiveness.

Canada’s framework leverages and aligns with global best practices for “green” taxonomies, while pioneering criteria for a “transition” taxonomy — the “missing middle” in climate finance.

The “green” label would apply to low-to-no carbon projects or activities that accelerate Canada’s clean energy transition—e.g., renewables, battery and storage technology, and Electric Vehicle (EV) infrastructure.

The “transition” label would apply to projects that substantially reduce emissions from hard-to-decarbonize sectors. Transition-labelled projects would also have limited lifespans and avoid making it either harder or more expensive to transition to net zero in the future. For example, a steel producer installing an electric arc furnace to reduce emissions from its operations would be a project eligible for transition investment status.

The framework is grounded in the science-based target of limiting global warming to 1.5° C — and all criteria and thresholds, for green as well as transition labels, would be aligned with that pathway.

The next steps in this process are to develop a draft Climate Investment Taxonomy based on this initial framework, and to establish an independent governance structure to formally create and maintain the Canadian taxonomy. The proposed governance structure would include regulators, financial institutions, provincial governments, and Indigenous rights holders.

Core Knowledge Partners

The Canadian Climate Institute, an independent, non-partisan, climate-research organization, led the analysis informing the taxonomy framework architecture developed in the Taxonomy Roadmap Report.

The Institute for Sustainable Finance, based at Smith School of Business, Queen’s University, provided an in-depth review of domestic and international reports on transition finance and taxonomies, a comparative survey of taxonomy and standard-setting governance models and an overview of domestic and international sustainable finance trends and developments to inform the Taxonomy Roadmap Report.

ISF Reference Materials which include a briefing document, background research, a video interview and other informative supporting materials can be found here.

Quotes

“Our financial systems can and must play a critical role in financing Canada’s transition to a climate-resilient, net-zero future. Tackling issues like climate change will require significant effort and investment. Clarity and a common language around green and transition investments is fundamental to scaling up the flow of capital to Canadian climate projects—from growing our clean energy industries to helping decarbonize our heavy-emitting sectors. A made-in-Canada taxonomy will help seize investment opportunities that will benefit our whole economy across the country.”
Barb Zvan, Lead, SFAC Taxonomy Technical Expert Group

“The Climate Investment Taxonomy Framework is a necessary step towards securing Canada’s competitiveness in a global market that increasingly values sustainable finance opportunities. We need the clarity this framework provides to attract global capital to made-in-Canada net zero solutions.”
Jim Leech, Chair, Advisory Council, Institute for Sustainable Finance, Chancellor Emeritus, Queen’s University, Former CEO Ontario Teachers’ Pension Plan

“The publication of the Transition Taxonomy roadmap for Canada is an important step forward. Canada has a carbon exposed economy at a time when global efforts to decarbonize are accelerating, resulting in important consequences for us as a nation. The successful Transition of our economy to net zero over time is hence one of our biggest national challenges, and one which will require tremendous investment. Today, with other countries setting rules and frameworks that will affect Canadian outcomes, it is ever more important that this Canadian Transition framework be established as an accepted benchmark to guide capital flows in a productive and consistent manner.”
Andrew Chisholm, Member, Expert Panel on Sustainable Finance

“The financial system needs a standardized and science-based way to determine whether specific projects in Canada align with global climate goals. By defining not only “green” investments but also “transition” activities, this ground-breaking framework could help accelerate capital flows to Canada’s emissions-intensive industries that can successfully be transitioned or transformed to align with a net zero future. This is something few other taxonomies in the world have done—and is instrumental in building and maintaining the confidence of global capital markets.”
Jonathan Arnold, Clean Growth Research Lead, Canadian Climate Institute

“This Framework is an important milestone for Canada’s financial and responsible investing sector and an essential step towards the development of a standardized taxonomy for Canadian businesses and investors. But this Roadmap is also exciting because it has global implications to address the transition economy. As a resource-based economy in Canada, we understand that the country needs not just a green taxonomy but also a transition taxonomy that enables investments in greenhouse gas reductions in currently high-emission industries. This is an area where Canadians have the opportunity to be global leaders. SFAC’s framework has the potential to set a new global standard for sustainable finance taxonomies by helping inform transition criteria not just in Canada but also in other markets.”
Caelan Welch, Research Associate, Institute for Sustainable Finance

“We look forward to the Sustainable Finance Action Council’s work on behalf of the Ministers of Finance and Environment and Climate Change Canada; particularly the taxonomy framework which we intend to leverage in our continuing work to ensure our capital rules fully capture the opportunities as well as the risks of climate change.”
Peter Routledge, OSFI Superintendent (remarks from the RBC capital markets bank CEO conference, Toronto, Ontario, January 9, 2023)

“Climate change and the transition to low-carbon growth will have profound impacts on virtually every sector of Canada’s economy. Ensuring that our financial system works efficiently is an important part of the Bank of Canada’s responsibilities. A well-functioning—and efficient—financial system has the important job of channeling capital to the most productive investments. A credible climate investment taxonomy defining both green and transition investments, as proposed by SFAC’s newly released framework, is critical to that goal. This is not only about managing the systemic risks that climate change presents to our economy but also helping position Canada to seize the climate-smart opportunities that consumers, workers and investors are looking for. I applaud this important milestone for sustainable finance in Canada, and globally.”
Tiff Macklem, Governor, Bank of Canada (reiterating remarks made at the 2020 Public Policy Forum)

“The Taxonomy Framework, with its commitment to science-based integrity, transparency, and accountability, is a critically important step in Canada’s transition towards a net-zero emissions economy. Green and transition financing are essential to shifting our high carbon-emitting economy towards climate resilience and circular economic activity, and clear standards will aid in attracting the investment needed. The goal is creation of rigorous objective criteria, anchored in climate science and aligned with taxonomies globally. To be eligible, financing will require transition plans for achieving net-zero emissions, effective climate disclosure, and assessment of products against a ‘do no significant harm’ standard.”
Dr. Janis Sarra, Professor of Law, Peter A. Allard School of Law and Principal Co-Investigator, Canada Climate Law Initiative

“The launch of Canada’s Climate Investment Taxonomy Framework is a milestone. It delivers a vital contribution to international efforts to mobilize investment flows to climate action. With a focus on both green and transition investments, Canada’s framework will help to scale the finance we need to change emissions intensive industries. It’s an example for other nations.”
Sean Kidney, CEO, Climate Bonds Initiative

“We welcome the publication by Canada of their roadmap for the development of a green and transition taxonomy. As Australia embarks on a similar journey, developing an Australian taxonomy to support our economic transition, we look forward to continuing collaboration with Canada, sharing lessons and insights along the way.”
Kristy Graham, Executive Office, Australian Sustainable Finance Institute (ASFI)

“Inclusive and realistic decarbonisation approaches are critical for immediate and effective action. Transitions are key to this. Facilitating an orderly and credible transition will allow for better decarbonisation approaches as this will encourage and enable all the relevant actors to start the journey and stay on the path. The approach of the Canadian Taxonomy has taken into consideration Canada’s distinctive circumstances and creates an excellent frame for transitions, while being congruent with the global decarbonisation ambition. It also opens the door for international operability. We look forward to exchanging more views and ideas with Canada and working together to engender concerted global action.”
Eugene Wong, CEO, Sustainable Finance Institute Asia

“The development of the Transition Taxonomy framework is foundational for increasing sustainable finance in Canada and for accelerating progress towards net-zero emissions. The clarity and consistency of an evidence-based process, informed by our Canadian reality, offer a path from which standards and policies can be based and with which investment decisions can be made. The Sustainable Finance Action Council has provided the direction and we must all move forward swiftly.”
Roger Beauchemin, President and CEO, Addenda Capital

“Canada’s most emissions-intensive industries need significant investments to decarbonize and to remain competitive as Canada and the world work to reach net zero emissions. At the same time, it’s critical to rapidly scale up activities that will help build a net zero future, such as renewables, batteries and storage, and clean hydrogen. The Climate Investment Taxonomy Framework will help to standardize and track these investments through time, and provides the credibility necessary to attract more global capital to Canada.”
Chris Severson-Baker, Executive Director, Pembina Institute